​Crash of ‘08 Haunting Markets: The Devil Shall Get His Due

Michael Markowski  |

The volatility of the world’s currency, equities and debt markets on Friday, June 24, 2016 after the United Kingdom’s (U.K.) citizens voted to leave the European Union (E.U.) is signaling that the ghost of the crash of 2008 continues to haunt the global markets. The stimulus strategies utilized by the world’s central banks to prop up their economies and markets since the crash of 2008 have not worked. The devil wants his due, and based on what happened on Friday, June 24, 2016, he will soon get his pound of flesh.

The S&P 500 traded up on heavy volume during the last 30 minutes of the June 23 trading day and closed at 2013. The close left the index within 17 points and less than one percent from its all-time high of 2130. The S&P 500’s barreling toward its all-time high on the eve of a significant global economic event that could have gone either way, and then suddenly collapsing to a new three-month low several hours later left … me … breathless.

I believe investors should liquidate all stocks and bonds — with the exception of sovereign debt securities and micro-cap companies — as soon as possible for the following reasons:

  • Indices within 5% of all-time highs — U.S. indices including the S&P 500 and the Dow 30 closed within five percent of their all-time highs on Friday, June 24, 2016. Even assuming a decline of 5% on Monday, June 27, an investor having an opportunity to liquidate within 10% of an all-time high for the market that might not be eclipsed for years is nothing to sneeze at.
  • Stock market is broken — The primary reason to get out of large-cap stocks is because the equities markets did not discount a Brexit leave; rather, a significant premium was paid for a E.U. stay. The fact that the markets absolutely did not anticipate this event indicates that the market is not simply awry, but that something is terribly wrong. The chart below depicts that at 11:00 AM on Wednesday, June 22 the S&P 500 advanced to a high of 2099, and began a steady decline that resulted in a closing of 2085, which was just above its low for the day. On the next day Thursday, June 23, the S&P opened up 16 points higher at 2101 and closed up by 1.4% at 2113, which was its high for the day and the week. Germany’s DAX, Japan’s Nikkei 225 and the U.K.’s FTSE 100 also made their highs of the week on Thursday, June 23, and closed for the day at above the Wednesday, June 22 closes.

Because of the strong momentum exhibited by the S&P 500 during the last two hours of trading on Thursday, June 23 — the eve of the outcome of the Brexit vote — I wrote the following article entitled “S&P to New All-time Highs Before NIRP Signal Reverts Back to Orange”. Equities.com published the article at 2:56 PM.

A report predicting the market would make a short term new high would not have been produced by me had I not been thoroughly convinced that the surge in the S&P 500 had fully discounted both a Brexit leave and a stay. Assuming either a Brexit stay or a Brexit leave vote, the S&P 500 was positioned to eclipse an all-time high of 2130 on Friday, June 24, 2016, considering the index closed at 2113 on Thursday June 23, 2016. A new all-time high for the S&P 500 was only 17 points away and less than a one percent increase.

My predicting the S&P would go to new all-time highs at the time appeared to be a no brainer. I was flabbergasted several hours later when I saw a headline on Bloomberg stating that the dollar had plummeted to below 100 yen. The volatility’s happening very quickly (since the dollar reversed to 102 yen) led me to believe that Bloomberg’s headline had been an error. When it appeared that the U.K.’s vote to leave the E.U. had won, I was further flabbergasted by the severe declines of all of the world’s equities markets. After all, I had believed that the S&P 500 had adequately discounted a “leave”. As I watched Bloomberg until 1:30 AM EST, I awaited the oversold bounce and rally that would have left the S&P 500 up or down marginally. Moreover, I was not the only veteran of 40 years, plus, to be completely confounded by this uncharacteristic market movement. When questioned by CNBC about why the market surged higher on heavy volume during the final hour of trading in an interview yesterday, Art Cashin, a 50-year market veteran who is the Director of NYSE floor operations for UBS, stated the following:

“I have never seen the market quite that wrong.”


“A lot of money put to work.”

The currency markets also got it completely wrong. Based on the stabilization of the dollar versus the yen for the previous seven days and the surge in the euro and dollar versus yen on June 23, the NIRP Crash Indicator’s signal went from its pre-crash imminent reading of Orange to the cautionary Yellow reading earlier in the day of Thursday, June 23. The indicator went from the Yellow reading to the Red, all-out crash reading by midnight on June 24. See “NIPR Crash Indicator Signal Now at “Red, All Out Crash Underway” reading”.

Throughout my 40-year career the major indices had always had the foresight to discount major events such as a Brexit occurring. The market had always been the ultimate price arbiter for equities and directional gyro for the economy. The gatekeepers of the U.S. equities markets did not foresee the Brexit. Instead they aggressively bid up the S&P 500 by 1.4% on the eve of the Brexit vote. In the final 30 minutes alone the S&P surged by seven points to close at 2013, which was only seventeen points from its all-time May 2015 high. For the S&P 500 and the indices of all of the world’s developed countries to have declined by 3% to 11% on the day after the vote was in and counted is unfathomable.

The stock market’s gyro is clearly broken and cannot be trusted. What caused this to happen is the crash of 2008. The biggest crash and most significant economic recession since 1929 resulted in
two significant changes for the U.S.’ capital markets.

1. The U.S. Federal Reserve taking drastic action to prop up the U.S. market and economy. The Federal Reserve’s monetary easing and low interest rate strategy, intended to stimulate the economy and markets, are key contributors to this massive bubble that is growing. The Fed’s contributions to the growing bubble are:

  • Easy and low-cost money policies have provided the liquidity for the largest companies to purchase their own shares.
  • Historically low, and increasingly lower interest rates have put a yield floor under the major indices because many members pay dividends. The lower the interest rates go, the higher the jacked up valuations of the S&P 500.

2. Passage of the Dodd Frank Act in 2010 was a consequence of the crash of 2008. The origin of the act, which the SEC began to implement in 2012, was expressly for the purpose of preventing another crash of 2008. Dodd Frank is the second of two key contributors to the S&P 500’s growing bubble. Under provisions of the act the SEC’s enforcement powers were strengthened and criminal liability was added for brokerage firms and brokers that recommended shares in small and risky companies. Dodd Frank’s contributions to the growing bubble:

  • An exodus of the brokers into the wealth management industry. To avoid the legal liabilities added by Dodd Frank, many of the straight commission brokers departed to the “fee-based assets under management” wealth-management industry, which is not under the jurisdiction of Dodd Frank. The change in compensation from straight commissions to fees has propped up the S&P 500. The wealth management industry and its advisors are doing everything possible to hold clients in stocks. The advisors know that when a client converts to cash the client will no longer pay an annual percentage fee based on the assets under management. Please see, “Outlook for the US Wealth Management Industry: “The Most Exciting Time”, January 27, 2015.


  • Dodd Frank decimated the capital markets for the smaller-size public companies. Those dwindling straight commission brokers who remain no longer recommend the shares of small companies. The shares of the small companies are too risky for the wealth managers. The result is that the divergence in the valuations for large and small companies is the widest that I have seen since 1977 when I entered the capital markets. Please see the chart below.

My discovering the widening divergence between the relative share prices and the valuations of large and small companies ranks among my most significant macro discoveries, including:

  • Dot-com market bottom — Recommending dot-coms to my StockDiagnostics newsletter subscribers when the dot-com bottomed in October 2002; and
  • Subprime mortgage crisis — Emphatically telling all readers of my Equities Magazine column to get out of the five major brokers (including Lehman, Bear Stearns and Merrill Lynch) a year before Lehman’s bankruptcy.

Because of my sensitivity to this widening divergence and what it can mean to investors, I have been on a nonstop quest to find the 100 best micro-cap stocks to recommend as quickly as possible. Based on the absurd valuations of the qualifying micro-caps I have already located, and those I am continuing to research, my only concern is that the micro-cap market could soar before I reach my goal of 100.


My recommendation is that investors deploy a black swan investing strategy. The New York Times best-selling author Nassim Nicholas Taleb devised the strategy of investing 90% of one’s liquid assets in government or sovereign debt securities, and the remainder in extremely high-risk/high-return investments including venture capital and micro-cap and low-priced stocks.

Taleb’s philosophy is both extremely simple and safe. Invest under the assumption that it is inevitable that there will be a “Black Swan” or one-off events that will devastate a market. Should such an event occur, the result would be that the shares of the companies, even those in the S&P 500 — arguably, the world’s highest quality stock index — would get clobbered. Thus, it is ludicrous for an investor to believe that they have little risk because they are fully diversified. Diversification does not protect an investor during periods of extreme volatility or against unforeseen mega-events. Taleb made huge profits from the crash of 1987, the bursting of the NASDAQ dot-com bubble in 2000, and from the crash of 2008. The 4-minute video below provides details about the black swan.

For an overview and access to links to the subjects that I cover, including the digital economy, negative rates, perfect shorts, and micro-cap stocks please go to www.michaelmarkowski.net. Free access to the NIRP Crash Indicator is available at www.dynastywealth.com.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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